Beans, Bacon, and Birdseye

Long before there were computers, automated warehouses, and refrigerated trucks foodservice distribution was a relatively unsophisticated business. Food was loaded in wagons and delivered to markets, consumers, retailers, and wholesalers in horse-drawn wagons from where it was grown and processed. With the exception of replacing horse-drawn wagons with diesel-powered conveyances that is pretty much the way food gets to market today although an increasing number of distributors have now started to replace fossil fuels with biodiesel.

As the business evolved individuals and companies that provided food grew, and in many cases either merged, consolidated, or acquired each other ultimately creating the foodservice landscape of today. Veterans of the industry will remember some of the early food distribution companies in America. Two such companies are PYA/Monarch and Rykoff Sexton which dated all the way back to the 1800’s and those company’s legacies still live on today as brands within US Foods.

A significant factor in the growth of foodservice distribution was fueled by Clarence Birdseye who was the father of frozen food in the 1920’s when he developed a freezing process that completely changed the way Americans ate. Originally starting in the fish business, Birdseye’s innovation extended to vegetables, fruits, and possibly the highest consumed food in America, the ubiquitous French Fry.

The growth of the business through the 40’s, 50’s, and 60’s was almost exclusively driven by the consumer grocery segment but beginning in the late 60’s and interesting phenomenon started to develop, that phenomenon was the restaurant business. Most food distributors were primary suppliers to the government, schools, prisons, hospitals, and a handful of restaurants and began to grow regionally in the most populated areas of the US. and largely were limited to canned foods, dry groceries, and thanks to Birdseye, frozen foods. Fresh products like milk, meat, produce, seafood, poultry, and bread were almost exclusively delivered by small local providers. Ironically, many of those suppliers ultimately became large distributors on their own when they added frozen and dry goods to their offerings while others were acquired by larger competitors.

Nick’s Seafood Pavilion – Yorktown, Virginia

In 1969 a man who had grown up on a ranch near Waco, Texas and had gotten his start in the food business working a part-time job at his local A&P grocery store had an ambitious plan to build what became the largest food distributor in the US. That man was John Baugh and he became the guiding force behind the founding of SYSCO when in 1969 he convinced the owners of eight other small food distributors to combine the nine companies, forming what he hoped to mold into a national foodservice distribution organization, one that would be able to distribute any food despite its regional availability.

John T. Baugh

The other eight original companies were: Frost-Pack Distributing Company (Grand Rapids, Michigan); Global Frozen Foods, Inc. (New York); Houston’s Food Service Company (Houston); Louisville Grocery Company (Louisville, Kentucky); Plantation Foods (Miami, Florida); Texas Wholesale Grocery Corporation (Dallas); Thomas Foods, Inc. and its Justrite Food Service, Inc. subsidiary (Cincinnati); and Wicker, Inc. (Dallas). The combined 1969 sales for the nine founding companies were $115 million. The company became a publicly traded company in 1970 and remains today as possibly the only publicly traded foodservice company in the US and today annual sales for the company exceed $46 Billion.

The Big One

In December 2013, Sysco announced it’s intent to purchase it’s largest rival US Foods. Many refer to this as the big one and the largest foodservice distribution acquisition in US history combining $46 billion giant Sysco with $20 billion US Foods.

US Foods like Sysco is largely a combination of acquisitions the majority of which began in 2000 when what was then US Foodservice acquired PYA/Monarch which was owned by worldwide giant Sara Lee and subsequently Alliant Foodservice formerly owned by food maker Kraft Foods. US Foodservice was essentially born from JP Foodservice in the 90’s when it acquired a combination of companies that included Rykoff Sexton, and a handful of companies in Virginia, North Carolina, and Tennessee. Most notable in that group was Bigger’s Bros. in Charlotte, North Carolina, Roanoke Restaurant Supply in Salem,Virginia, and King’s Foodservice in Knoxville, Tennessee.

US Foodservice was ultimately acquired by grocery store giant Royal Ahold in 2000 and subsequently survived a significant accounting scandal in 2003 allegedly perpetrated by a few executives at the corporate office as well as some connected companies that were connected to US Foodservice. According to published reports some of the executives were convicted of various offenses and Jim Miller, the CEO of US Foodservice settled a suit with Royal Ahold when he agreed to pay back an estimated $8 million in bonuses. In 2007 US Foodservice was acquired by private equity firms Kohlberg, Kravits, & Roberts (KKR) and Clayton, Dublier & Rice, (CDR). CDR had also acquired Alliant Foodservice from Kraft Foodservice before selling it to US Foodservice in 2001. Both KKR and CDR are diversified in a broad range of industries including healthcare, energy, real estate, hedge funds, and many consumer businesses to include Hertz, TruGreen, and ServiceMaster.

The Bureau of Competition, The Feinstein Effect

FTC Tweets Anti-competitive Rhetoric

The Bureau of Competition a bureau of the Federal Trade Commission (FTC) is headed by Deborah L. Feinstein has now stepped in to block the acquisition of US Foods by Sysco after the panel of commissioners voted 3-2 not to approve the merger and subsequently filed a complaint and is seeking an injunction to block the acquisition. The Commission is headed by five Commissioners, nominated by the President and confirmed by the Senate, each serve a seven-year term and no more than three Commissioners can be of the same political party. The President chooses one Commissioner to act as Chairman. None of the commissioners have served before 2010 and the two commissioners that voted to allow the acquisition wereMaureen K. Ohlhausen, Sworn in on April 4, 2012 and Joshua D. Wright, Sworn in on January 11, 2012.

One of the most dynamic components of this action is the fact the FTC has taken to the TwitterSphere to make the announcement. The fact that Feinstein’s opinions against the merger are also quoted in the Twitter feed is also perplexing since most would think that the director would be an impartial arbiter of the process. Also the 75% tweet refers to national accounts which would be those franchise and company owned concepts that have a national footprint like Panera Bread, Chili’s, Applebees, and some fast casual national restaurant chains most of which are not serviced by the broadline distribution centers. Even more compelling, major chains usually don’t negotiate product costs with Sysco or US Foods as they obtain national contract pricing with major manufacturers and often negotiate contracts on major commodity items customized to their exact specifications. Sysco and US Foods generally offer fixed fee per case contracts with those entities based on delivery and service. The competition between the two largely centers on the ability to provide the lowest cost for the highest degree of service, not the cost of the product.

Opinion

In February 2014 Feinstein gave a speech in San Francisco entitled “The Forward Looking Nature of Merger Analysis” and in that speech she states “In a market where competitive conditions are stable, those historical facts may provide all the information we need to feel comfortable in our predictions of the future. But where the fortunes of a competitor are likely to change – for better or for worse – we need to take a closer look.” Ask any foodservice professional if there is anything stable in the competitive landscape that includes over 15,000 entities that supply food and restaurant related products.

In a related example, many criticized the growth of Walmart in the consumer grocery business claiming monopoly but the landscape continues to evolve as concepts like Fresh Market, Whole Foods, and Trader Joes continue to grow and flourish. In those examples they offer different experiences and product offerings than Walmart while there are virtually no examples to suggest that Walmart’s marketshare has caused prices to go up. To the contrary, Walmart’s scale in the grocery space has enabled it to be the lowest cost provider for a wide range of products including food.

Given the extremely competitive nature of the foodservice industry how can anyone state with any degree of certainty that Sysco’s acquisition of US Foods will alter the competitive landscape to the detriment of customers and consumers, now or in the future? Moreover, one needs to look no further than the Appendix A of the complaint where some local markets show that the post merger share will be 100% in San Diego, 100% of the local market? Does that mean there is not a single foodservice supplier in San Diego other that Sysco or US Foods?

Despite the fact that Sysco entered into an agreement to divest 11 US Food distribution centers with sales in the $4.6 billion range the FTC still voted to block this acquisition. More importantly, why should an American company be forced to divulge it’s intentions? What if US Foods had sold those divisions to Performance Foodservice before the Sysco acquisition was announced?

Finally, the FTC’s actions seem to disregard the strengths of the “Super Regionals” like Gordon Foodservice, Reinhart, Shamrock, Ben E. Keith, Labatt, and even Performance Foodservice to name but a few. If the resulting acquisition by Sysco of US Foods causes prices to climb or restaurant customers become disenchanted with Sysco they, the super regionals as well as local suppliers will readily jump on the opportunity.

To be clear, I am neither for or against the merger, but I am against the government intervention of free trade and believe that companies have an absolute right to grow and acquire their competitors to build scale and grow dividends for their investors by reducing costs, providing jobs, increasing profits, paying taxes, and ultimately returning dividends to it’s shareholders. The tens of thousands of dedicated foodservice people don’t need the government to run it’s business and one needs to look no further than the last 100+ years of foodservice to figure that out. So as far as the acquisition is concerned, or in this case the future of foodservice distribution, the FTC has demanded a hearing on the July 21, 2015, let’s hope they settle before then.

William McFall “Mac” Pearce

Dedicated in tribute to William McFall “Mac” Pearce. Mac Pearce was an amazing leader in the foodservice distributor landscape from PYA/Monarch, Inc. to Performance Foodservice. Mac passed away in September 2014 and his leadership, compassion, benevolence will surely be missed by all that knew him.